Eurozone Inflation Drop Fuels Talk of Rate Cut

Inflation across the countries that share the euro fell further below the European Central Bank's target in January, official figures showed Friday, in a development that has stoked speculation of another interest rate reduction.

Eurostat, the EU's statistics office, said inflation in the 18-country eurozone fell to 0.7 percent in the year to January from 0.8 percent the previous month. The consensus in the markets was for a modest rise to 0.9 percent.

The unexpected fall is likely to trigger speculation that the eurozone is about to suffer a debilitating bout of deflation — a sustained drop in prices that hurts the economy as consumers delay purchases in the hope of getting bargains later and businesses postpone investment and fail to innovate.

The ECB meets Thursday for its monthly policy meeting and a number of economists think that it may ease monetary policy further in order to prevent a slide into deflation. The ECB's mandate is to keep the inflation rate stable at just below 2 percent.

"The pressure on ECB president Mario Draghi to follow up his recent dovish words with further policy action is very strong," said Jonathan Loynes, chief European economist at Capital Economics.

Some economists say it may cut its main interest rate from its current record low of 0.25 percent to 0.10 percent. Others think it may decide to make its deposit rate negative, a move that would essentially make banks pay to have their money parked at the central bank. That, the theory goes, may make them lend more, which would shore up economic activity and stimulate inflation.

Separately, in a positive development, Eurostat said eurozone unemployment fell by 129,000 in December to 19.01 million. The decline was the biggest fall since April 2007 and largely due to an 81,000 drop in Spain, which many economists think is on the mend following wide-ranging labor market reforms.

The overall unemployment rate in the eurozone, however, was unchanged at 12 percent.

Despite those signs of improvement, unemployment across the eurozone is still not far off its all-time high of 12.1 percent. The overall figure also masks huge divergences between countries. While Germany and Austria, for example, have unemployment rates around 5 percent, Greece and Spain still have a little more than one in four people out of work.

The situation among the young is even starker, with the youth unemployment rate in Greece up at 59.2 percent in October, the last month for which figures were available. Spain, though, saw its youth unemployment rate fall to 54.3 percent in December from 55.2 percent, as the number of under 25 year olds out of work fell by 20,000.

Inflation across the countries that share the euro fell further below the European Central Bank's target in January, official figures showed Friday, in a development that has stoked speculation of another interest rate reduction.Eurostat, the EU's statistics office, said...